The finance ministry may extend tax benefits for investment in infrastructure bonds for one more year. But the limit ofRs 20,000 may not change, despite appeals from the industry.

This would mean a tax saving ofRs 2,000 toRs 6,200 for an individual, depending on the tax slab.

A finance ministry official said the revenue department was considering allowing income-tax deduction on investments up toRs 20,000 in infrastructure bonds in Budget 2013 as well. The ministry may also consider allowing some more entities to issues such bonds, but it is not in a position to raise the cap, given its tight fiscal situation and bleak revenue prospects.The government is struggling to meet its tax and non-tax revenue targets. Net direct tax collections in the first nine months of the year (April-December 2011) stood atRs 3,23,955 crore, which is just 61 per cent of the Budget Estimate ofRs 5,32,651 crore for 2011-12. This leaves the revenue department with the Herculean task of collectingRs 2,08,696 crore in the remaining three months.

Section 80CCF of the Income Tax Act makes an investment in infrastructure bond eligible for tax deduction. This is in addition to the deduction ofRs 1,00,000 allowed under Sections 80C, 80CCC and 80CCD of the Act.

The deduction was first allowed in Budget 2010-11 for meeting the dual objective of encouraging savings and meeting long-term needs of the infrastructure sector. The benefit was allowed in Budget 2011-12 also, but the government did not increase the ceiling despite demands from the industry.

In 2010, the government had allowed Life Insurance Corporation, Industrial Finance Corporation of India (IFCI), Infrastructure Development Finance Company (IDFC) and any non-banking finance company classified as infrastructure finance company by the Reserve Bank of India such as L&T Infrastructure to issue tax-free infrastructure bonds.

In Budget 2011, the govenment also allowed National Highways Authority of India (NHAI), Indian Railway Finance Corporation and Housing and Urban Development Corporation Ltd to issue such bonds. This year, NHAI, IFCI, L&T Infra, IDFC, Power Finance Corporation, Rural Electrification Corporation and SREI Infrastructure Finance have raised long-term funds through issuance of these bonds.

A recent pre-Budget meeting with Finance Minister Pranab Mukherjee saw banks reiterating their long-standing demand of allowing them to issue tax-free infrastructure bonds to support long-term funding needs. They also sought special incentives for those investing in infrastructure bonds, and asked for clarity and broadening of the definition of infrastructure.

The tenure of tax-free infrastructure bonds is a minimum of 10 years with a lock-in period of five years. Any company raising money through such bonds is not allowed to offer any interest rate that is higher than the yield of 10-year government bonds.